Covid, inflation, and higher interest rates created a doomsday scenario that forced a number of major retail names out of business while others were pushed to the edge of destruction.
The pandemic changed certain shopping patterns. Consumers, for example, needed fewer nice outfits for work because many of them stopped going into the office. People also bought a lot of items for their homes during the early days of covid, pulling forward spending on things like electronics, furniture, and home repair.
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Some retailers benefited from the changes while others adapted quickly. A number of chains, however, saw sales drop and had no way to recover.
Two major retail names, David's Bridal, and Party City, saw their sales drop because people weren't having parties or traditional weddings. Both were rescued at the last minute because investors were willing to keep operating most of their locations and bankruptcy courts saw that as a better option than having them close.
Bed Bath & Beyond, Tuesday Morning, and Christmas Tree Shops were not so lucky. All three brands suffered sales drops and were unable to adjust. In a different economic climate, they might have found loans to pull out of Chapter 11, but high interest rates made that impossible and all three have been liquidated.
The retail carnage, however, has not stopped. A number of companies remain at risk of a bankruptcy filing, according to a key industry monitor.
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Here's how we know which companies face a bankruptcy risk
Legally, publicly traded companies have to report when they believe they are at risk of defaulting on their debt or filing for bankruptcy. That standard does not always provide full transparency.
To offer a wider view of which companies face bankruptcy risk, Credit Risk Monitor has created the Frisk score, which "indicates a company’s level of financial stress, based on the probability of bankruptcy over a 12-month horizon."
The Frisk score has proved 96% accurate in predicting U.S. public company bankruptcy during this time horizon, according to Credit Risk Monitor.
The company uses a scale of 10-1, with 10 being the least risk and 1 being the most. A company with a 1 on the Frisk scale has a 9.99% to 50% chance of filing for bankruptcy in the next 12 months.
"The structural statistical model used for the Frisk score was developed and back-tested using company data and bankruptcies between 2003 and 2013," the company said. "This period covers 9,600 unique businesses, and includes 580 bankruptcies over a period including the Great Recession."
Credit Risk Monitor says it's providing transparency for customers, vendors, and potential partners. "Public company risk can hide in plain sight, but it doesn’t have to take you off guard," the company says.
These companies have a high risk of bankruptcy
Currently, five companies have a FRISK score of 1, RetailDive reported:
- Farfetch
- Joann
- Qurate Retail
- Rent the Runway
- Rite-Aid
Of those five, Rite Aid (RAD) -) has been the most publicly discussed company considering a Chapter 11 filing. It has been widely reported that the drugstore chain is expected to close hundreds of stores as part of its survival plan.
The chain has $3.1 billion in long-term debt.
Joann (JOAN) -) has been laying off workers and has more than $1.1 billion in debt while its sales have declined. The chain does not have a permanent chief executive and has not disclosed a timetable to name one.
A number of well-known retailers including Big Lots, Petco, and Container Store have a Frisk score of 2. That puts them at a 4% to 9.99% chance of filing for bankruptcy in the next 12 months.
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